Thank You

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As 2012 prepares to call it quits and retreats into the historic mists where expiring years go to join their calendrical ancestors near and far, the least we can do is thank the old boy. For, by any measure, these were a memorable 12 months, filled, in turn, by frustration and satisfaction. They encompassed a somnolent economy at home as well as a fragile European Union that threatened to fracture at any moment and take the euro with it, but managed through deft and delay to muddle through.

Besides the Old World teetering on the edge of, or already mired in, recession, worsened by a widespread veneration of austerity, the year drawing to a close was witness to a staccato recovery by a conspicuously less vigorous China; a lackluster performance of gold after decades of glistening gains; and, of all things, a neat cyclical-bull market in equities fueled by the dexterity of Uncle Ben and his counterparts around the globe in debasing their currencies and by investors' insatiable lust for yield in a zero-interest-rate world.

By no means does this exhaust the claims that the departing year can legitimately make for being extraordinary, but, at the very least, they bring into sharp relief the remarkable crosscurrents that raged from January right through its final waning hours, which were charged with anxiety spawned by the discomfiting presence of the fiscal cliff. It was, too, lest we forget, an election year, featuring the incredible implosion of Mitt Romney and triumph of Barack Obama, despite the handicap of a character tic that prompted him to give away the store every time he sat down to negotiate virtually anything with the perennially belligerent swamis of the GOP.

Retaining the presidency seems to have fortified Mr. Obama's spine, at least temporarily. In any event, the well-publicized, seemingly boundless enmity between the two parties hasn't been ameliorated one whit, as illustrated in their reluctance in the scant time remaining to thrash out some sort of makeshift agreement that would defer the fiscal strictures ordained by the law enacted as part of a 2011 deal to raise the debt ceiling. The howls you hear are from our beloved congressmen squealing about having their vacations from the cushiest job imaginable cut short and being forced to return to Washington in a Hail Mary effort to keep the nation from tumbling over that scary cliff.

THE PROSPECTS FOR THESE last-minute "heroics" look decidedly iffy. And further beclouding the picture is Mr. Boehner's inability to deliver the Republican vote in the House. But we can't really blame those GOP lawmakers, since they were no doubt confused by the speaker's unveiling an all-but-indecipherable Plan B, having forgotten apparently to devise a Plan A.

What we find truly absurd is how, as the clock ticked on, the markets complacently put their faith in the notion that the "smart money" (whoever they might be) was darn-near unanimous in endorsing the shibboleth that a deal had been cut by the legislators to circumvent the ever-more-menacing fiscal cliff. All by themselves, even casual spectators of the investment scene would almost instinctively know that when the consensus is so overwhelming, it's rarely right.

Even as we scribble these lines, the president is huddling with the so-called leaders of both parties to have one more shot at patching together a detour around that daunting cliff. Anything is possible, of course, but it would take the mother of all miracles to achieve a political truce that's an absolute prerequisite for that to happen, and Washington is not famous for conceiving even minor miracles.

The received opinion on the Street is that should all these last-ditch efforts come to naught, both the economy and the markets are destined to keel over. Obviously, it doesn't take all that much insight to come to that conclusion, and up to a point, it echoes our feeling. We suspect, though, that the impact will be greater on the markets than on the overall economy. And we draw some comfort from the fact that two economists, Michael Darda of MKM Partners and Paul Kasriel of Econtrarian, whose calls over the years have mostly been on the money and whose judgment we respect, don't think the world necessarily is coming to an end should we go over the cliff.

In his latest dispatch, Michael notes that an abrupt drop in consumer confidence in December as measured by the Conference Board, to 65.1 from the previous month's 71.5, got a lot of media coverage that connected it with the looming fiscal cliff. What didn't get more than a speck of attention was that the entire decline in Jane and John Q's confidence was in the volatile "expectations" category. By contrast, the "present situation index" advanced to a new cyclical high last month, and "jobs hard to get" hit a new low since recovery began.

None of this, commented Michael, is to say "there are no signs of risk aversion." Among them was that velocity of money remains depressed and "investors are literally paying the federal government to borrow from them" (which he takes as "making a mockery" of fears that the U.S. is headed for a fiscal crisis). He points out that the one comparable recession during the past 100 years, in 1945, involved a fiscal 10 times the size of the fiscal cliff and was also associated with a slowdown in monetary growth at a time when the velocity of money was falling. The Fed, Michael says, is making what he dubs "an open-ended effort to avoid such a scenario," and he believes it has a good chance to succeed.

Paul Kasriel retired last April as the designated prognosticator and economy-watcher for Northern Trust and is no stranger to this sacred space. What we particularly like about Paul are his willingness to stand apart from the crowd in sizing up the economic outlook and his leavening sense of humor, a missing element from most practitioners of the dismal science. Both qualities were very much in evidence in a recent paper he put out taking issue with the idea embraced by what he calls "the economist quacks" that we're headed for hell in a handbarrow (aka recession) if taxes go back to where they were during the Clinton era.

"I keep hearing," he explains, "that if tax rates and revenues rise, a huge amount of spending power will be sucked out of the economy." He asserts that's rubbish. "The Treasury is going to collect higher taxes from me and either transfer them to you or buy something from you. In other words, an increase in tax revenues will not 'suck' spending power out of the economy, but rather redistribute that spending power." He readily grants that "you may not like the outcomes of this redistribution," but suggests you not confuse it with a net decline in spending as a whole.

Paul also takes issue with the idea that Uncle Sam's spending is out of control. Does anyone bother to take a gander at the data? he wonders. No question that outlays soared when the economy fell out of bed at the start of the recession, and money was wildly pumped into the financial system and the like to contain the damage.

But when the concern that the recession would morph into depression subsided, so did the level of government spending. Since early 2010, growth in such expenditures, including entitlements, defense, interest, waste, and fraud have been, Paul reckons, "quite tame," indicating to him that the $1 trillion reduction in spending authorized by Congress back in 2011 "is biting."

We can't say we buy every bit of either Paul's or Michael's analyses and arguments. But we cotton to their contrarian take on the economy and the presumed fiscal crisis as worth sharing with you.

OUR FRIENDS AT BESPOKE Investment Group have come up with their variation of the "Dogs of the Dow" approach to playing the market. It consists of buying the 10 highest-yielding stocks in the Dow Jones Industrial Average at the start of every year. Last year, investors using this strategy found themselves barking up the wrong tree: The Dogs were up more than 7%, but the other 20 had an average gain of more than double that amount.

Nonetheless, over the years the Dogs have acquitted themselves quite well. So Bespoke has thoughtfully provided the likely pack for 2013 and their yields as of last week: